Blog

Careful accounting is vital to the financial health of a nonprofit organization. It’s important to the day-to-day operations of the business, and it’s also important for donor, auditor, and market transparency.

Mike Hablewitz, CPA at Wegner CPAs, recently joined Peter Benson, SVP of Business Services at Park Bank, to share his insights on important considerations for nonprofit investment management. 

Balance Investments

Before embarking on a new investment approach, or changing a current investment strategy, it’s important to consider the organization’s liquidity needs for payroll and other operating expenses. From there, a nonprofit can choose from a mix of investment types, such as:

• Savings/Money Market Accounts - liquid cash accounts [4:52]
• Certificates of Deposit (CDs) - interest-bearing savings vehicles that are less liquid than cash accounts [5:23-6:33]
• Stocks, bonds, mutual funds - market-driven investments [6:34]
• Alternative investments - investments such as real estate, private equity, and venture capital (note: alternative investments carry additional risk and are not suitable for all investors) [6:54]

There is no requirement that a nonprofit hold separate banking or investment accounts for special purposes such as large gifts, or capital campaigns. Some organizations choose to have multiple accounts for each fundraising need, but this can become unwieldy from an accounting perspective. [8:02]

Have an Investment Policy

An Investment Policy is a set of written, agreed-upon guiding principles that help govern a nonprofit’s investment strategy. The strategy includes its asset allocation and risk tolerance, which are both important for achieving long-term goals, and preventing panic in market dips. Two nonprofits that have similar sizes and financial resources may choose to have very different asset allocations and risk tolerance profiles, which is why it’s advised to work with a financial advisor on the details. It’s also a good idea to review and amend the investment policy on a regular basis. [9:00-13:58]

Reconcile Regularly

Nonprofits will ideally reconcile their accounts monthly, or quarterly at the very least, and adjust all investment reconciliations to fair market value.  Adjusting to fair market value gives a board confidence in the organization’s true financial picture. The nonprofit team can also choose to include expected investment returns as part of its monthly reconciliation process. However, Mike suggests not budgeting for investment returns, and treating any unexpected earnings as “gravy.” This approach can help the nonprofit ensure it has adequate operating capital, regardless of market gains. If endowments are involved, there are a lot of additional accounting considerations, and a CPA can help a nonprofit navigate them. [14:20]

Maintain Internal Controls

One last way to stay buttoned up in investment accounting is via a policy of internal controls.

This is a checks & balances system that designates “doers and reviewers.” For example, one set of people that has access to withdraw or designate funds for use, and another set of people who review and approve or deny the transactions. Auditors look at internal controls as part of their review process, and lack of oversight or monitoring will trigger concern, putting the nonprofit at risk. A reserve policy is another way to maintain controls, as the reserve policy prevents potential losses from pulling money out of the market to cover reserves. [19:02]

While these considerations may seem daunting, they are relatively simple to address with the right guidance from a CPA, financial advisor, and banking partner.  To learn more about Park Bank’s commitment to nonprofits’ success, get in touch with our team.

Part 2 | How to Navigate Investments for Nonprofits: Investing